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Weekday Trader

Asset Managers May Go With the Flow

By

Allison Krampf

Updated Sept. 30, 2004 11:59 p.m. ET

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UNTIL LAST FALL, asset managers appeared unscathed by the scandals that rocked Wall Street.

Then their worst nightmare occurred: Eliot Spitzer, the attorney general of New York, accused some of them of trading improprieties.

Spitzer's investigations led to big settlements such as the $250 million paid by
Alliance Capital Management Holdings,
one of the country's largest investment managers. Alliance also agreed to an average 20% reduction in retail fund fees for at least five years.

The fund scandals emerged just as equity markets cooled down. So, it's no surprise that the Standard & Poor's Asset Management industry group has fallen by 10% since December 31, trailing the S&P 500 by ten percentage points.

But the worst may be over for asset managers. Having settled with Spitzer, Alliance can attract money from skittish investors again. And its strong equity exposure should help it when stocks rally again.

At a Glance: Alliance Capital Management Holdings (AC)

Stock Price:

$35.50

52-Wk High:

$39

52-Wk Low:

$29.47

Market Cap:

$2.83 billion

Earnings Est. (2004):

$2.28

Forward P/E (2004):

15.5x

Projected Long-term EPS Growth:

12%

Projected EPS Growth (2005/2004):

12.7%

Sales ( as of 06/30/2004):

$2.95 billion

Div. Yield:

5.93%

CEO:

Lewis Sanders

Headquarters:

New York, NY

BlackRock (BLK)

Stock Price:

$ 73.95

52-Wk High:

$76

52-Wk Low:

$48.56

Market Cap:

$4.71 Billion

Earnings Est. (2004):

$2.89

Forward P/E (2004):

25.5x

Projected Long-term EPS Growth:

15%

Projected EPS Growth (2005/2004):

21%

Sales ( as of 06/31/2004):

$677.1 Million

Div. Yield:

1.39%

CEO:

Laurence Fink

Headquarters:

New York, NY

By contrast, bond-oriented asset managers such as BlackRock may suffer as short-term interest rates finally begin to climb.

"What we have here is an equity market that has better long-term growth prospects than bonds do," notes Craig Woker, an analyst with Morningstar.

Morningstar predicts that equity markets should show 8% annual gains for the next few years, while it is predicting only 5% returns in the fixed income markets.

Such an outperformance by stocks should help Alliance, which has almost 60% of its $480.6 billion assets under management in equities.

Though it trades separately, Alliance is a unit of AXA, the French financial services firm, which holds about 58% of the company's outstanding shares. Alliance owns Sanford C. Bernstein.

As time goes by, Alliance should be able to put the fund scandal behind it.

Ken Worthington, an analyst with CIBC World Markets, predicts that as the one-year anniversary of Alliance's settlement approaches, mutual fund consultants will again feel comfortable putting clients into Alliance funds.

"As long as the performance is there, consultants should start recommending Alliance funds again," says Geoff Bobroff, the president of Bobroff Consulting, an East Greenwich, R.I.-based mutual fund consulting firm.

The stock, while not dirt cheap, appears reasonably priced, too.

Late Thursday, Alliance shares fetched 35.5. Though that's close to their 52-week high (see At a Glance), it's almost 40% off the all-time high of 59.35, hit in 2001.

What's more, the stock trades at less than 14x its 2005 earnings estimates of $2.57 per share, a slight premium to Alliance's projected long-term annual earnings growth rate.

But it also changes hands at only 2.2x book value, below its median 2.8x book for the last five years, according to Thomson Baseline.

Alliance also pays an attractive 5.93% dividend yield, nearly triple the S&P 500's average dividend yield of about 2%.

But if Alliance surfs the stock market rally,
BlackRock
may no longer ride the bond market's wave.

BlackRock's stock has appreciated by almost 40% this year, trumping the S&P 500, the S&P Financials group, and the S&P Asset Management group.

The secret of its success? A heavy orientation toward bonds, which have shown surprising strength. Historically, BlackRock's shares have performed well during sluggish equity markets. (PNC Financial Services owns 71% of BlackRock.)

Fixed- income products represented about 72% of its $309.7 billion in assets under management; stocks accounted for only 4%.

Standard & Poor's questions whether BlackRock will be able to attract inflows at a pace fast enough to offset any declines in the bond market, and that could hold back its share price.

The Federal Reserve has raised the federal funds rate three times since June. But ten-year treasuries have posted big gains since the Fed began to tighten, surprising many analysts and helping BlackRock's shares.

BlackRock is trying to diversify away from bonds. On August 26, it said it would acquire State Street Research & Management from MetLife for $375 million in cash and stock. (BlackRock expects the deal to close early next year.)

Still, BlackRock stock is no longer a value.

Late Thursday the shares fetched 73.49, only 3% off their all-time high (see At a Glance). The stock trades at almost 21x 2005 earnings estimates, a premium to BlackRock's projected long-term annual earnings growth rate.

But at a whopping 6.1x book value, it's way beyond the S&P Asset Management industry group's average 2.7x book and above its own median 5.5x book for the last five years, too, according to Thomson Baseline.

BlackRock officials declined to comment.

Of course, the bond market hasn't shown much weakness, so BlackRock's stock could hold up pretty well. And the stock market has been stuck in the doldrums for the past year (see Getting Technical, "Just When the Bulls Thought It Was Safe&hellip;," September 22). If that continues, Alliance's stock could go nowhere, too.

But current trends won't last forever. So, when the wheel turns, investors may want to ally themselves with Alliance and jump off BlackRock's stock.

FULL DISCLOSURE:

Ken Worthington, an analyst with CIBC World Markets, says he owns Alliance Capital Management Holdings stock. But he says that CIBC has not had an investment banking relationship with Alliance over the last 12 months

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